Today’s American Banker had an article titled What YouTube Teaches Banks About Customer Experience.
I do not know what YouTube teaches banks about customer experience. But I know what the iPhone and iPad have taught swindlers – hence the connection between the business and crime.
Apple’s business model is to provide cheap apps to a large number of users; about 250,000 apps to over 10 million users. You pay a few dollars for an app that often performs magnificently. Everyone is happy. You, because you got a good application at a next to nothing price, the vendor, who sold tens and maybe hundreds of thousands of apps, and Apple, which gets a cut from all this. The trick is the low price and large volume – the ultimate retail model.
Imagine now that you are a big company with a large number of customers and you go rouge: you begin to charge them a few dollars each month for no reason. Would anyone complain or notice? And if they did, would anyone have time to spend 45 minutes on the phone with “Mary” in Bangladesh to clear a $2 charge?
Exactly. (And if someone complains, refund their goddam few dollars.) So you get to make tens of millions of dollars a month swindling customers and hoping not to get caught.
How does this model work in practice? Click on the following links for the answer. You don’t have to read the articles. Just glance at the heading or the lead paragraph.
Click 1
Click 2
Click 3
Click 4
These are mere samples. Spend a few minutes goolging “class action lawsuit and telecom” and you will be surprised at the pervasiveness of the fraud.
Now comes the punchline: click here to see why your government has 3 branches and why the Supreme Court exists.
Monday, November 29, 2010
Thursday, November 18, 2010
An Essay On the Emergence of India
During his recent trip to India, President Obama said that India “it not simply emerging. Indian has emerged”.
I concur in principle. But I am not the president of the United States and my assertions will not be accepted as proof. So, I am writing a short essay to explain my concurrence.
In the simple sentence India has emerged, we have no problem with India. The reference is clear and universally understood. But the “has emerged” part is vague because it is obviously metaphorical; as a large country, India was never hidden or submerged. I must then explain: i) what does emerge mean in the context or, to put it differently, in what sense can a large country “emerge”; and ii) what is the evidence that India in practice has accomplished the task, or fulfilled the requirements, of emerging.
Recall that capital takes social relations as it finds them and then, over time, turns them into capitalistic, i.e., transaction based, relations. The transformation is alternatively heralded as “improvement”, “reform”, “modernization”, “progress” and “development” – all words with positive connotations because the yardsticks of judgment are shaped by, and thus favor, capital-based relations.
Take modern. The word is nothing but a reflection and measure of the extent of the intrusion of capital into social relations, a point that Chaplin noticed and relayed in Modern Times. The more the intrusion, the more modern a society is said to be.
To make this point clearer, look at Cavallini’s 1290 painting, The Last Judgment.
Now compare it with Holbein’s 1533 painting, The Ambassadors.
The span between the two works is a mere 240 years. Cavallini’s work, furthermore, belongs to the Renaissance period which immediately preceded modernity. Yet, a sea change has taken place between the two. The Last Judgment looks “old” to us, with an unmistakable undertone of otherworldliness.
The Ambassadors, by contrast, is contemporary and modern. The two men confidently gazing at us could be models posing for a fashion journal in New York City.
The difference, as I previously remarked, is in the transformation of European society from the feudal to capitalist system. The Ambassadors are surrounded by a collection of valuable, traded commodities with the means of navigation symbolizing overseas trade. To capture all that, Holbein is forced to use the oil medium in the same way that modern advertisers use color picture: to accentuate the colors and fineness of the men’s wealth, including their wardrobe. Their pose and gaze is the pose and gaze of successful men of affairs, something that we see everyday in the business section of newspapers. That is why The Ambassadors looks modern to us.
Emergence has the same genealogy. The more capital-based relations intrude into the social fabric of a country, the more “emerged” it becomes. When even the far away villages are conquered in this way, the country can be said to have fully emerged.
Before taking up the case India, though, let us read this short passage from Vol. 3:
When I was writing these lines in 2005, microfinancing – lending a few hundred dollars to poor peasants to turn them into successful entrepreneurs – had captured the imagination of social reformers as the practical side of Mother Teresa’s dispensing of love to the poor. Its promoter, Muhammad Yunus, received the Nobel Peace Prize in 2006.
I was struck by the shamelessness and the absurdity of the idea. In the Inferno, the sinners’ physical deformities correspond to the kind of sin they have committed. I imagined that had there been a paradise with the same logic of reward, Mother Teresa and Muhammad Yunus would be present there, one with a large bleeding heart, the other with an oversized penis, both overlooking the wretchedness of the earth.
Five years later, the verdict is in, as reported in today’s New York Times:
With the bankers and venture capitalists as usurers – they charge 30% per annum – the indebted widower must flee. There are grand designs for her village.
Has India emerged, then? I must say that it has, in principle. But we have not heard the last of this story yet.
I concur in principle. But I am not the president of the United States and my assertions will not be accepted as proof. So, I am writing a short essay to explain my concurrence.
In the simple sentence India has emerged, we have no problem with India. The reference is clear and universally understood. But the “has emerged” part is vague because it is obviously metaphorical; as a large country, India was never hidden or submerged. I must then explain: i) what does emerge mean in the context or, to put it differently, in what sense can a large country “emerge”; and ii) what is the evidence that India in practice has accomplished the task, or fulfilled the requirements, of emerging.
Recall that capital takes social relations as it finds them and then, over time, turns them into capitalistic, i.e., transaction based, relations. The transformation is alternatively heralded as “improvement”, “reform”, “modernization”, “progress” and “development” – all words with positive connotations because the yardsticks of judgment are shaped by, and thus favor, capital-based relations.
Take modern. The word is nothing but a reflection and measure of the extent of the intrusion of capital into social relations, a point that Chaplin noticed and relayed in Modern Times. The more the intrusion, the more modern a society is said to be.
To make this point clearer, look at Cavallini’s 1290 painting, The Last Judgment.
Now compare it with Holbein’s 1533 painting, The Ambassadors.
The span between the two works is a mere 240 years. Cavallini’s work, furthermore, belongs to the Renaissance period which immediately preceded modernity. Yet, a sea change has taken place between the two. The Last Judgment looks “old” to us, with an unmistakable undertone of otherworldliness.
The Ambassadors, by contrast, is contemporary and modern. The two men confidently gazing at us could be models posing for a fashion journal in New York City.
The difference, as I previously remarked, is in the transformation of European society from the feudal to capitalist system. The Ambassadors are surrounded by a collection of valuable, traded commodities with the means of navigation symbolizing overseas trade. To capture all that, Holbein is forced to use the oil medium in the same way that modern advertisers use color picture: to accentuate the colors and fineness of the men’s wealth, including their wardrobe. Their pose and gaze is the pose and gaze of successful men of affairs, something that we see everyday in the business section of newspapers. That is why The Ambassadors looks modern to us.
Emergence has the same genealogy. The more capital-based relations intrude into the social fabric of a country, the more “emerged” it becomes. When even the far away villages are conquered in this way, the country can be said to have fully emerged.
Before taking up the case India, though, let us read this short passage from Vol. 3:
This confusing of moral, legal and financial is a common error among those looking at the appearances only. Here is the economic columnist of the New York Times [Paul Krugman] injecting morality into the subject of default: “Advanced countries – the status to which Argentina aspires – regard default on debt as a moral sin.”
In truth, “advanced countries” hold no such view. In the U.S., corporations use bankruptcy for a variety of strategic and tactical reasons – most commonly when they plan to renege on their pension liabilities. More fundamentally, in the Anglo Saxon jurisprudence, there is no inherently immoral or forbidden concept, of the kind one finds in religion. The foundation of this jurisprudence is the commercial consideration of the early stages of capitalism in England.
The “moral aspects” of default about which columnists and scholars of law are in the habit of sounding off are the indignation of the owners of capital at the prospect of losing their money. Because their views and interests set the social and cultural agenda, this view is gradually codified through casuistry and given a moral and ethical cover – and sold to the public as such.
Default is an incident in finance. Starting from the primitive societies in which “recalcitrant debtors … could be put to death and even hewn in pieces by their creditors or sold as slave beyond the Tiber” we arrive at Shylock at the dawn of capitalism who demands a pound of flesh in lieu of his money. His demand, nota bene, is legal, written into an enforceable contract. More humanitarian imprisoning of delinquent borrowers then follows, a “remedy” still in practice in many societies. As commerce develops, usury is recognized as impediment to business and outlawed. But the usurer continues to exist in the margins of the society, supplying the “weak credit” with funds and using various loopholes of the law to enforce payment.
As financial markets grow in size and sophistication, they take on the subject of default – itself a subset of credit risk – peel its social shell and turn it into a tradable commodity. The process begins with the most receptive and “logical” markets such as corporate bonds, where the relative value of credit and the possibility of default are an integral part of pricing; “cost of default” has long been a staple of this market: “Mr. Goldman [a fixed income strategist] says that a corporate bond’s interest rate spread over the government bond curve is the cost of issuer’s option to default.” Shaming, like jailing and maiming, is still used as a way of reducing defaults.
When I was writing these lines in 2005, microfinancing – lending a few hundred dollars to poor peasants to turn them into successful entrepreneurs – had captured the imagination of social reformers as the practical side of Mother Teresa’s dispensing of love to the poor. Its promoter, Muhammad Yunus, received the Nobel Peace Prize in 2006.
I was struck by the shamelessness and the absurdity of the idea. In the Inferno, the sinners’ physical deformities correspond to the kind of sin they have committed. I imagined that had there been a paradise with the same logic of reward, Mother Teresa and Muhammad Yunus would be present there, one with a large bleeding heart, the other with an oversized penis, both overlooking the wretchedness of the earth.
Five years later, the verdict is in, as reported in today’s New York Times:
Initially the work of nonprofit groups, the tiny loans to the poor known as microcredit once seemed a promising path out of poverty for millions. In recent years, foundations, venture capitalists and the World Bank have used India as a petri dish for similar for-profit “social enterprises” that seek to make money while filling a social need. Like-minded industries have sprung up in Africa, Latin America and other parts of Asia.The last point is crucial. There was always a village usurer. But however hateful he was, he lived in the community and was a part of it. It was inconceivable for him to force a widower to flee the village. He would gain nothing from it.
But microfinance in pursuit of profits has led some microcredit companies around the world to extend loans to poor villagers at exorbitant interest rates and without enough regard for their ability to repay. Some companies have more than doubled their revenues annually.
Now some Indian officials fear that microfinance could become India’s version of the United States’ subprime mortgage debacle, in which the seemingly noble idea of extending home ownership to low-income households threatened to collapse the global banking system because of a reckless, grow-at-any-cost strategy. Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.
Government officials in the state say they had little choice but to act, and point to women like Durgamma Dappu, a widowed laborer from this impoverished village who took a loan from a private microfinance company because she wanted to build a house.
She had never had a bank account or earned a regular salary but was given a $200 loan anyway, which she struggled to repay. So she took another from a different company, then another, until she was nearly $2,000 in debt. In September she fled her village, leaving her family little choice but to forfeit her tiny plot of land, and her dreams.
“These institutions are using quite coercive methods to collect,” said V. Vasant Kumar, the state’s minister for rural development. “They aren’t looking at sustainability or ensuring the money is going to income-generating activities. They are just making money.”
Reddy Subrahmanyam, a senior official who helped write the Andhra Pradesh legislation, accuses microfinance companies of making “hyperprofits off the poor,” and said the industry had become no better than the widely despised village loan sharks it was intended to replace.
“The money lender lives in the community,” he said. “At least you can burn down his house. With these companies, it is loot and scoot.”
With the bankers and venture capitalists as usurers – they charge 30% per annum – the indebted widower must flee. There are grand designs for her village.
Has India emerged, then? I must say that it has, in principle. But we have not heard the last of this story yet.
Tuesday, November 9, 2010
A Footnote to the Post Below
Using footnotes in blogs is awkward. It forces the reader to switch back and forth between the main text and footnote, an extra step that disrupts reading. Hypertext suffers from the same drawback.
In a printed page, the matter is easier, but only if the footnote is at the bottom of the page. With a quick movement of the eyes then, the reader can read the footnote and continue with the main text.
In my books I use footnotes in two ways: to provide the source for a material I quote and to buttress the argument I make in the main body of the text. In the post below, I pointed out that when capital cannot generate profits, it will have no reason to borrow money, even if the money is offered at no cost. Under that condition the focus shifts to cutbacks, including dismantling the plant and equipment.
If I were writing that in a book, I would have footnoted it with the following Financial Times story. Under the heading US banks see demand for business loans drop, the paper reported today:
In a printed page, the matter is easier, but only if the footnote is at the bottom of the page. With a quick movement of the eyes then, the reader can read the footnote and continue with the main text.
In my books I use footnotes in two ways: to provide the source for a material I quote and to buttress the argument I make in the main body of the text. In the post below, I pointed out that when capital cannot generate profits, it will have no reason to borrow money, even if the money is offered at no cost. Under that condition the focus shifts to cutbacks, including dismantling the plant and equipment.
If I were writing that in a book, I would have footnoted it with the following Financial Times story. Under the heading US banks see demand for business loans drop, the paper reported today:
Bank loan officers say that demand for loans from small US companies fell in the past three months, casting doubt on how much the Federal Reserve can stimulate the economy ...every bank reporting a decline in small business loan demand said that its customers had caught back on their investment in plant or equipment.Does Bernanke know this? That is the subject of the concluding part of the Time Preference/QE series.
There was a decline in loan demand from larger companies as well, with 25 per cent of loan officers saying it had fallen compared with 18 per cent who said that it rose.
Sunday, November 7, 2010
Time Preference, Kim Kardashian, Quantitative Easing, Good Black Swan – 1 of 2
The depth, sophistication and musicality of Persian poetry is unmatched in any other language. Many of the great Iranian poets were believed in their time to have divine inspirations, so perfect is the fusion of form and content in their poems. And then there was the legendary spontaneity. A popular form of entertainment in the court or bazaar alike was throwing 4 impossibly unrelated words at a poet — toe, cow, ocean and Christ, for example — which he then used fil-bedaheh in a 4-line stanza to express an overlooked truth about life. Fil-bedaheh means on the spot, without thinking and contemplation. Such power I think had its roots in the poets’ philosophical and religious world view. If you believed that all things came from God, then all had commonalities, i.e., all were related. It was only the matter of perception of seeing the common link and the skill of putting them into a coherent whole.
The title of this post comes from that tradition, except that there is nothing fil-bedaheh about it. In fact, I made up the title after I had finished the piece, which is not quite the same thing! I, too, am a man of our time, writing in New York of 2010 where, like Ace Greenberg, everyone is looking for a little unfair advantage.
There is, in the standard economics theory taught to all freshmen, the notion of “time preference”. According to this conjecture, “people” — that would be all people: men, women and children everywhere — prefer “now” to “then”; they’d rather have $100 now than one year later. So if they wait one year to get the money, they would demand more, say $105, for their sacrifice. That is why interest rate exists! The difference between $100 now and $105 in one year is the 5% annual interest rate.
On Wednesay, the Federal Reserve announced phase II of its quantitative easing program (QE2), in which it will buy $600 billion of long-term U.S. government bonds over the next eight months. The idea behind QE2 is to “drive down interest rates and encourage more borrowing and growth”.
Gotcha, Ben Shalom Bernanke! Remember your Washington Post article, published just after the announcement of QE2 to soften the critics?
But if the rates are lowered, the time preference will be destroyed. That’s what you taught in your Princeton economics course. With zero or very low interest rates, there is no incentive to act now, because the difference between then and now is zero or very little. In that case, why would corporations choose to invest now instead of say, one year from now, huh? What do you have to say to that?
I believe in the narrowest interpretation of time preference: that in our mid to late 50s we tend to be more mature than third-graders. I know that it is not a general or inexorable law.
Between being hanged today and next year, people would choose next year. That is also true of having a colonoscopy, getting an eviction notice, losing one’s job and life's other unpleasantries. Why, the word procrastination would not exist if people always preferred “now” to “then”. But it does, thus pointing to the hidden hedonistic supposition behind time preference: it exists only in relation with acquiring and consuming pleasurable things. The mindset that conjures up time preference, in other words, is that of a Kim Kardashian or a Paris Hilton. The economists representing that mindset take the idea and dress it up in high language and mathematical notations for respectability. Paul Samuelson, whose name pops up whenever a vacuous idea comes up, was one of the most vulgar, and therefore the most outstanding, representatives of that lot. Look at the title of his paper and then read the drivel in the abstract to see what I mean.
Beyond empty-headed women and mountebanks, what gives rise to the illusion of time preference and helps sustain and institutionalize it is the commodity fetishism of a consumer society. That is why this moon-is-made-of-green-cheese nonsense that a first-grader could refute survives. No less than the “anti-establishment” author of the Black Swan divides black swans to good and bad groups. He calls Viagra a good black swan!
Here is a link to Wikipedia on time preference. Do not limit yourself to that site. Google “time preference” and take a look at some of the results — this one, for example, written by 3 inquiring minds from the nation’s premier institutions of higher learning — to get an idea about the level of scholarship and critical thinking in 21st century America.
There is no such thing as time preference in economics. Interest rates do not arise because humans prefer now to then. If that were the case, we would have billions of interest rates, corresponding to the subjective perception of every person on the planet. Quite the opposite: it is precisely because interest rate exists that time has “value”.
Interest is a deduction from profit. It is the share that finance capital claims from the profit of industrial capital. From Vol. 3:
The industrial capital in the West has migrated to the East and South in search of lower labor costs and higher profits. (Capital has migrated, not its owners.)
Alas, the investment opportunities in the East and South cannot accommodate all the mass of ready-to-be-employed capital. So, a portion of capital in the West is left behind, sitting idle with no place to go.
That cannot go on. It cannot be allowed.
One way of generating employment opportunities for the idle capital is lowering labor costs in the West. If you are reading this in the Western hemisphere, everything you read in your local newspaper about economics and “politics” revolves around this issue. Cameron, Sarkozy, Papandreou, Zapatero, Cowen, Dombrovskis, even Merkel have no higher priorities. I have written about this issue. See, for example, here and here.
This idleness has a physical manifestation as well, but its most telling sign is the large pile of cash that corporations have amassed on their balance sheet.
Economics-professor-turned-the-Fed-chairman does not understand this process; at best he understands it superficially. He is trying to revive the activities of industrial capital by lowering the rates, fancying that with rates at zero or close to zero, the prospect of even low profit rate like 2% will induce corporations to borrow and invest. But the process is not reversible. Corporations cannot be induced to making investment – no matter how low the interest rates – if their investments would not generate income. That is why they have large spare, i.e., unused, capacity. Bernanke absent-mindedly admits that much when he writes that “low and falling inflation indicate that the economy has considerable spare capacity”. When corporations do not use the money they already have – because they cannot – what would they do with more money?
Corporations sitting on a large pile of cash which they cannot invest buy other corporations to benefit from “synergy”. That is the polite word for layoffs – hardly the stuff of economic recovery.
The title of this post comes from that tradition, except that there is nothing fil-bedaheh about it. In fact, I made up the title after I had finished the piece, which is not quite the same thing! I, too, am a man of our time, writing in New York of 2010 where, like Ace Greenberg, everyone is looking for a little unfair advantage.
***
There is, in the standard economics theory taught to all freshmen, the notion of “time preference”. According to this conjecture, “people” — that would be all people: men, women and children everywhere — prefer “now” to “then”; they’d rather have $100 now than one year later. So if they wait one year to get the money, they would demand more, say $105, for their sacrifice. That is why interest rate exists! The difference between $100 now and $105 in one year is the 5% annual interest rate.
***
On Wednesay, the Federal Reserve announced phase II of its quantitative easing program (QE2), in which it will buy $600 billion of long-term U.S. government bonds over the next eight months. The idea behind QE2 is to “drive down interest rates and encourage more borrowing and growth”.
***
Gotcha, Ben Shalom Bernanke! Remember your Washington Post article, published just after the announcement of QE2 to soften the critics?
Easier financial conditions [by you pushing the rates lower via QE2] will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.Never mind that housing shows no sign of life. What is the story about lower corporate bond rate encouraging investment? You are saying that QE2 will spur growth because it will make money available to businesses now.
But if the rates are lowered, the time preference will be destroyed. That’s what you taught in your Princeton economics course. With zero or very low interest rates, there is no incentive to act now, because the difference between then and now is zero or very little. In that case, why would corporations choose to invest now instead of say, one year from now, huh? What do you have to say to that?
***
I believe in the narrowest interpretation of time preference: that in our mid to late 50s we tend to be more mature than third-graders. I know that it is not a general or inexorable law.
***
Between being hanged today and next year, people would choose next year. That is also true of having a colonoscopy, getting an eviction notice, losing one’s job and life's other unpleasantries. Why, the word procrastination would not exist if people always preferred “now” to “then”. But it does, thus pointing to the hidden hedonistic supposition behind time preference: it exists only in relation with acquiring and consuming pleasurable things. The mindset that conjures up time preference, in other words, is that of a Kim Kardashian or a Paris Hilton. The economists representing that mindset take the idea and dress it up in high language and mathematical notations for respectability. Paul Samuelson, whose name pops up whenever a vacuous idea comes up, was one of the most vulgar, and therefore the most outstanding, representatives of that lot. Look at the title of his paper and then read the drivel in the abstract to see what I mean.
Beyond empty-headed women and mountebanks, what gives rise to the illusion of time preference and helps sustain and institutionalize it is the commodity fetishism of a consumer society. That is why this moon-is-made-of-green-cheese nonsense that a first-grader could refute survives. No less than the “anti-establishment” author of the Black Swan divides black swans to good and bad groups. He calls Viagra a good black swan!
Here is a link to Wikipedia on time preference. Do not limit yourself to that site. Google “time preference” and take a look at some of the results — this one, for example, written by 3 inquiring minds from the nation’s premier institutions of higher learning — to get an idea about the level of scholarship and critical thinking in 21st century America.
***
There is no such thing as time preference in economics. Interest rates do not arise because humans prefer now to then. If that were the case, we would have billions of interest rates, corresponding to the subjective perception of every person on the planet. Quite the opposite: it is precisely because interest rate exists that time has “value”.
Interest is a deduction from profit. It is the share that finance capital claims from the profit of industrial capital. From Vol. 3:
When the rate of return of industrial and commercial capital falls, credit capital must likewise lower its rate. Otherwise, it would have to sit idle, having found no takers. Interest rates could indeed fall to zero and remain there for a long time if commercial or industrial capital cannot generate a profit. Under such conditions, they would have no reason to borrow, as borrowing would only aggravate the loss. In that regard, the Federal Reserve in the U.S. that raises and lowers interest rates to “cool down” or “stimulate” the “economy” merely reacts to market condition rather than shapes it.These lines were written more than 5 years ago. What are the conditions now?
***
The industrial capital in the West has migrated to the East and South in search of lower labor costs and higher profits. (Capital has migrated, not its owners.)
Alas, the investment opportunities in the East and South cannot accommodate all the mass of ready-to-be-employed capital. So, a portion of capital in the West is left behind, sitting idle with no place to go.
That cannot go on. It cannot be allowed.
***
One way of generating employment opportunities for the idle capital is lowering labor costs in the West. If you are reading this in the Western hemisphere, everything you read in your local newspaper about economics and “politics” revolves around this issue. Cameron, Sarkozy, Papandreou, Zapatero, Cowen, Dombrovskis, even Merkel have no higher priorities. I have written about this issue. See, for example, here and here.
This idleness has a physical manifestation as well, but its most telling sign is the large pile of cash that corporations have amassed on their balance sheet.
Economics-professor-turned-the-Fed-chairman does not understand this process; at best he understands it superficially. He is trying to revive the activities of industrial capital by lowering the rates, fancying that with rates at zero or close to zero, the prospect of even low profit rate like 2% will induce corporations to borrow and invest. But the process is not reversible. Corporations cannot be induced to making investment – no matter how low the interest rates – if their investments would not generate income. That is why they have large spare, i.e., unused, capacity. Bernanke absent-mindedly admits that much when he writes that “low and falling inflation indicate that the economy has considerable spare capacity”. When corporations do not use the money they already have – because they cannot – what would they do with more money?
***
Corporations sitting on a large pile of cash which they cannot invest buy other corporations to benefit from “synergy”. That is the polite word for layoffs – hardly the stuff of economic recovery.
***
If QE2 will not influence investment decisions and economic recovery, what will it do?
Saturday, November 6, 2010
value for money - linear or exponential ?
Value for Money ( short for V4M ) is basically how much values you get from the money you paid. It is often irrelevant how much is the price of an item or service. Whether or not a person pay for something is simply because of how he perceives the values he is getting.
If a person perceive values more than its price, he would paid for it !
If a person perceive values less than the price, he would NOT paid for it.
There are 3 types of V4M perceptions. This article will cover 2.
Linear model of V4M is basically thinking all features are alike. Hence for every feature the person is looking for, he would be willing to pay some price for it. But if a particular feature is substantially higher price, he would think its NOT worth it.
For example, a person is looking for a phone that has Wifi feature and cool-look feature. A typical wifi phone may cost him $500, a cool looking wifi phone may cost $2,000. A linear V4M guy will go for the typical Wifi phone.
Exponential type of V4M model describes a person who values most on perfection. He understands that many providers can easily give an average services / products but it is very rare for a provider to provide a perfect solution. Hence he is willing to pay any price for one particular feature especially when such feature is not easily available elsewhere.
An exponential V4M guy would have go for the cool looking wifi phone as per above example.
One will always find Linear V4M guy a FRUGAL person. He analyses well before making a purchase. He may go for 2nd hand goods as long as they still work well. Such a person is always the next door millionaires whom you never knew.
Exponential V4M guy on the other hand is the high society type of person. The only way he can sustain his life style is by being filthy rich. His perception on values is also the main driving force for him to stay rich. Such a person is always a very high cash flow fellow but often unable to retain a net profit.
There is no right or wrong in either V4M models. But it is important for you to recognize your own V4M model and then focus on living that life. Problems arise when an exponential V4M model guy thinks he is frugal OR when a linear v4M model guy keeps over pay.
What is your V4M model ?
Sunday, October 24, 2010
High Frequency Trading and Flash Crash – 1: The Ones Who Saw It Coming
The ignorant, pompous academics who created “Continuous-time Finance” — ignorant because they were pompous, pompous because they were ignorant — considered it the crown jewel of their intellectual achievements. Happy were those years of success in the limelight, with this one nominating that one for the Nobel Prize who then turned around and nominated this one for the same. Nobels all around, was the happy cry. Nobels to the Crowd!
To understand Continuous-time Finance (CTF), we have to understand Newtonian mechanics and its language, differential calculus.
Newtonian mechanics revolve around key terms like instantaneous speed and constant acceleration. These are not intuitive concepts. The only way of really grasping them is through mathematics, specifically, calculus. In fact, this branch of mathematics was invented by Newton (and independently, by Leibniz) for that very purpose.
Newton was working to solve the puzzle of the working of celestial bodies that begins with the old question: Why does an apple fall from a tree to the ground but the moon does not? The answer is that the moon is constantly falling but is kept in orbit by the centrifugal force of its rotation around the earth. To get to that answer, one has to know the dynamics of falling bodies: how far they fall and how fast. That is the definition of speed.
We calculate the speed of a moving object by dividing the distance it has traveled by the time it takes to travel. The distance between NY and LA is 3,000 miles. If a plane travels it in 5 hours, the speed of the plane is 600 miles/hour.
What about the speed of a golf ball dropped from the top of the Empire State Building? The building is 1,800 ft tall and it takes 10 seconds for the ball to hit the sidewalk.
In this case, we cannot directly divide the distance by time. What worked for the speed of the plane won’t work here because we assumed the speed of the plane was constant, a logical assumption for our purposes. But the speed of the falling golf ball is not. It’s zero at the top of the building, just before the fall. It is quite high — something we need to calculate — when the ball hits the sidewalk. Between these two points, the speed constantly increases. Since space and time are continuous, it is a perfectly valid question to ask: what would the speed of the ball be in, say, 3.21 seconds after the fall, or after it has fallen 329.73 feet? That is instantaneous speed, the speed at that instant. That is where differential calculus comes in. It is a tool for calculating the instantaneous change in the value of a variable (speed or distance fallen, in our example), as a result of instantaneous change in another variable (time).
CTF is the adaptation of this system to finance. It is finance in a “world” in which prices change continuously and instantaneously, just like the distance traveled by a falling golf ball, only that prices are bi-directional. They go up and down.
The first use of calculus in finance dates back to the beginning of the 20th century. In 1900, French mathematician Louis Bachelier published a differential equation describing stock price movement. It is a perceptive and intelligent model. In Vol. 3 I showed how its use decades later significantly contributed to the success of the Black Scholes option valuation formula.
Of course, the stock price changes in the Paris Bourse of the early 20th century were far from instantaneous. But Bachelier reasoned that the sum of instantaneous changes could approximate the price change over longer intervals; that, after all, is what the other half of calculus – integral calculus – is all about. At any rate, the stock prices seemed to set the irreducible minimum level of activity to which one could apply calculus without looking absurd or ridiculous. Sure, one could use calculus to “calculate” the change in the price of a pizza pie “as a result of” change in its size. But that would be a fool’s errand, a pointless and absurd exercise that only an idiot would undertake. So the matter rested there for nearly 50 years.
It must be a cosmic law of fools that if a fool’s errand exists, a fool is bound to show up, if not sooner then later. The fool came in the form of Paul Samuelson. The future “Titan” had set out to make a name for himself and had decided on mathematics as the desired means. If a Frenchman could apply differential calculus to stock prices, the American was going to outdo him and apply it to all prices – a pound of sugar, a house, an airplane engine, a dozen eggs, a cup of coffee, a diamond ring, a bulldozer. He was coming whether prices were ready or not.
A publicity picture that the New York Times used in his obituary last year shows Samuelson against a blackboard with some bogus equations. Here is the picture.
In this picture, the blackboard is used the way a Caribbean Island might be used in the photo-shoot of a swim-suit model: to accentuate the main attraction’s endowments – physical in one case, intellectual in the other. Let us look at it closely.
In the center, there is price-vs-quantity (P-Q) graph, the crudest and most superficial idea in economics, the if-price-goes-up-demand-drops stuff that only a Sarah Palin might buy. That is what Samuelson is teaching. But he has jazzed up that nonsense with the standard notation of calculus. P and Q have become P(t) and Q(t), meaning that they are “functions of time”, i.e., they change with time.
In the upper right hand corner, at about “one o’clock”, P is expressed by a partial derivative equation. The first term is L, which must stand for labor. The second term is t, which is time. The equation is saying that price — any price — changes with “labor” and time. “Labor” is presumably the “price of labor” or wages.
I need to digress here to say a few words on the role and function of math and why we use it.
Take this simple problem. A father is 48 years old; his son, 18. How many years from now will the father’s age be 3 times the son’s?
If all you know of math is arithmetic, you will struggle with this problem; you have to use a relatively complex chain of reasoning to solve it.
Thanks to Islamic mathematicians, however, we have algebra, the science of manipulating the unknowns. Let the unknown “number of years from now” be X. X years from now, father will be (48 + X) years old; his son, (18 + X). For what value of X then (48 + X) is 3 times (15 + X)? Solving (48 + X) = 3 (18 + X), we get X = -3. Negative X means that the event happened 3 years ago, when the father was 45 and the son 15.
Note how math corrected us. We stated the problem in the future tense: “how many years from now will ...”. Math ignored that phrasing and gave us the right answer by pointing to the past.
That is the function and raison d`etre of mathematics: a tool to employ when intuition, imagination or contemplation could not solve the problem, or solve it only with great difficulty. In the example of the falling golf ball, if you do not know how to differentiate a function, you could not possibly know that the speed of a golf ball 3.21 seconds after the fall would be 102.72ft/second.
Return to the blackboard now and look at P(t)and Q(t): Price and quantity are functions of time, meaning that they change with time. What purpose does this addition of “change with time” serve? Time is a condition of experience. There is absolutely nothing in the world, without exception, which is not a “function of” time. We bothered with learning algebra and writing the equation (48 + X) = 3 (18 + X) because it helped us solve a problem. But writing P(t) instead of P merely looks more complex without in any way helping us learn more about how prices change.
Every single expression on the blackboard behind Samuelson is an indictment of the writer, a prime facie evidence of chicanery. Only a complex character – 1/3 pompous ass, 1/3 ignorant fool, 1/3 perspicuous cheat – would put this tritest of facts into mathematical language – and pose in front of it.
(In calculus, the “function of” association is used not for stating the obvious but for signaling the variable with regards to which a function is to be differentiated or integrated. The distance X that a golf ball falls is X = 16t(squared). To find the speed of the ball at an instant, we must differentiate the function with respect to t. So, we say that X is a function of time, t: X = f(t). The differentiation, by the way, yields V(t) = 32t. The speed of the ball 3.21 seconds later would be V(3.21) = 32 x 3.21 = 102.72ft/second.)
Not everyone fell for Samuelson, though. Harvard refused to hire him. The newspaper of the record mentioned the incident in the obituary but used a red herring to spin it:
There was of course a reason for Samuelson’s embrace of mathematics, which I pointed out in Vol. 1:
Ultimately, though, what the man said was drivel. It corresponded to nothing in real life, so it was forgotten. Then came the collapse of the Bretton Woods system in the early 70s and the rise of speculative capital which gave a new lease on life to the application of mathematics in finance.
Speculative capital is capital engaged in arbitrage: simultaneously buying and selling two equivalent positions. That amounts to – and requires – the instantaneous buying and selling of the positions. From Vol. 1:
That is how continuous-time finance came to be, with the practitioners of the discipline becoming known as “quants” or “rocket scientists” by virtue of their mastery of mathematics.
But they knew nothing of economics or finance. In Bernestein’s early 90s bestseller, Capital Ideas, tellingly sub-titled The Improbable Origins of Modern Wall Street, there is a telling passage about them:
The consequence of this ignorance, as always, was in prediction of the future. If you know the relation between mass, force and acceleration, you could predict with precision the behavior of a satellite millions of miles from the earth. You could surmise the existence of a planet even if you could not see it.
Economic relations are never that exact, but fundamentals still apply. If you know that profit rate tends to fall, you would not be surprised by the persistent unemployment in the West or the events taking place in Europe; you would not ask, How is it that as the people’s health improve, they have to work longer and harder for less wages and a smaller safety net?
Or, if you know that arbitrage is by definition self-destructive, you would expect a crash in financial markets – if not sooner, then later.
But the pioneers of modern finance knew nothing of these principles. They noted the increase in trading and observed that it led to lowering spreads. But they interpreted it as the march of capital markets towards “efficiency”, which to them meant low trading costs. And since the markets were only rising, it stood to reason that everyone would soon be trading.
The new world of CTF thus envisioned was a bona fide Norman Rockwell tableau in which everyone constantly and incessantly traded: businessmen in New York during their commute, Valley girls in LA on their way to parties, salt-of-the-earth farmers in the Midwest, the rednecks in the South, retirees in Florida, blacks in Watts and smartly dressed preppies in Greenwich – they all traded all the time. Jews, too. Yes, most definitely Jews, too.
The real life turn of events proved a tad more Gothic.
To understand Continuous-time Finance (CTF), we have to understand Newtonian mechanics and its language, differential calculus.
Newtonian mechanics revolve around key terms like instantaneous speed and constant acceleration. These are not intuitive concepts. The only way of really grasping them is through mathematics, specifically, calculus. In fact, this branch of mathematics was invented by Newton (and independently, by Leibniz) for that very purpose.
Newton was working to solve the puzzle of the working of celestial bodies that begins with the old question: Why does an apple fall from a tree to the ground but the moon does not? The answer is that the moon is constantly falling but is kept in orbit by the centrifugal force of its rotation around the earth. To get to that answer, one has to know the dynamics of falling bodies: how far they fall and how fast. That is the definition of speed.
We calculate the speed of a moving object by dividing the distance it has traveled by the time it takes to travel. The distance between NY and LA is 3,000 miles. If a plane travels it in 5 hours, the speed of the plane is 600 miles/hour.
What about the speed of a golf ball dropped from the top of the Empire State Building? The building is 1,800 ft tall and it takes 10 seconds for the ball to hit the sidewalk.
In this case, we cannot directly divide the distance by time. What worked for the speed of the plane won’t work here because we assumed the speed of the plane was constant, a logical assumption for our purposes. But the speed of the falling golf ball is not. It’s zero at the top of the building, just before the fall. It is quite high — something we need to calculate — when the ball hits the sidewalk. Between these two points, the speed constantly increases. Since space and time are continuous, it is a perfectly valid question to ask: what would the speed of the ball be in, say, 3.21 seconds after the fall, or after it has fallen 329.73 feet? That is instantaneous speed, the speed at that instant. That is where differential calculus comes in. It is a tool for calculating the instantaneous change in the value of a variable (speed or distance fallen, in our example), as a result of instantaneous change in another variable (time).
CTF is the adaptation of this system to finance. It is finance in a “world” in which prices change continuously and instantaneously, just like the distance traveled by a falling golf ball, only that prices are bi-directional. They go up and down.
The first use of calculus in finance dates back to the beginning of the 20th century. In 1900, French mathematician Louis Bachelier published a differential equation describing stock price movement. It is a perceptive and intelligent model. In Vol. 3 I showed how its use decades later significantly contributed to the success of the Black Scholes option valuation formula.
Of course, the stock price changes in the Paris Bourse of the early 20th century were far from instantaneous. But Bachelier reasoned that the sum of instantaneous changes could approximate the price change over longer intervals; that, after all, is what the other half of calculus – integral calculus – is all about. At any rate, the stock prices seemed to set the irreducible minimum level of activity to which one could apply calculus without looking absurd or ridiculous. Sure, one could use calculus to “calculate” the change in the price of a pizza pie “as a result of” change in its size. But that would be a fool’s errand, a pointless and absurd exercise that only an idiot would undertake. So the matter rested there for nearly 50 years.
It must be a cosmic law of fools that if a fool’s errand exists, a fool is bound to show up, if not sooner then later. The fool came in the form of Paul Samuelson. The future “Titan” had set out to make a name for himself and had decided on mathematics as the desired means. If a Frenchman could apply differential calculus to stock prices, the American was going to outdo him and apply it to all prices – a pound of sugar, a house, an airplane engine, a dozen eggs, a cup of coffee, a diamond ring, a bulldozer. He was coming whether prices were ready or not.
A publicity picture that the New York Times used in his obituary last year shows Samuelson against a blackboard with some bogus equations. Here is the picture.
In this picture, the blackboard is used the way a Caribbean Island might be used in the photo-shoot of a swim-suit model: to accentuate the main attraction’s endowments – physical in one case, intellectual in the other. Let us look at it closely.
In the center, there is price-vs-quantity (P-Q) graph, the crudest and most superficial idea in economics, the if-price-goes-up-demand-drops stuff that only a Sarah Palin might buy. That is what Samuelson is teaching. But he has jazzed up that nonsense with the standard notation of calculus. P and Q have become P(t) and Q(t), meaning that they are “functions of time”, i.e., they change with time.
In the upper right hand corner, at about “one o’clock”, P is expressed by a partial derivative equation. The first term is L, which must stand for labor. The second term is t, which is time. The equation is saying that price — any price — changes with “labor” and time. “Labor” is presumably the “price of labor” or wages.
I need to digress here to say a few words on the role and function of math and why we use it.
Take this simple problem. A father is 48 years old; his son, 18. How many years from now will the father’s age be 3 times the son’s?
If all you know of math is arithmetic, you will struggle with this problem; you have to use a relatively complex chain of reasoning to solve it.
Thanks to Islamic mathematicians, however, we have algebra, the science of manipulating the unknowns. Let the unknown “number of years from now” be X. X years from now, father will be (48 + X) years old; his son, (18 + X). For what value of X then (48 + X) is 3 times (15 + X)? Solving (48 + X) = 3 (18 + X), we get X = -3. Negative X means that the event happened 3 years ago, when the father was 45 and the son 15.
Note how math corrected us. We stated the problem in the future tense: “how many years from now will ...”. Math ignored that phrasing and gave us the right answer by pointing to the past.
That is the function and raison d`etre of mathematics: a tool to employ when intuition, imagination or contemplation could not solve the problem, or solve it only with great difficulty. In the example of the falling golf ball, if you do not know how to differentiate a function, you could not possibly know that the speed of a golf ball 3.21 seconds after the fall would be 102.72ft/second.
Return to the blackboard now and look at P(t)and Q(t): Price and quantity are functions of time, meaning that they change with time. What purpose does this addition of “change with time” serve? Time is a condition of experience. There is absolutely nothing in the world, without exception, which is not a “function of” time. We bothered with learning algebra and writing the equation (48 + X) = 3 (18 + X) because it helped us solve a problem. But writing P(t) instead of P merely looks more complex without in any way helping us learn more about how prices change.
Every single expression on the blackboard behind Samuelson is an indictment of the writer, a prime facie evidence of chicanery. Only a complex character – 1/3 pompous ass, 1/3 ignorant fool, 1/3 perspicuous cheat – would put this tritest of facts into mathematical language – and pose in front of it.
(In calculus, the “function of” association is used not for stating the obvious but for signaling the variable with regards to which a function is to be differentiated or integrated. The distance X that a golf ball falls is X = 16t(squared). To find the speed of the ball at an instant, we must differentiate the function with respect to t. So, we say that X is a function of time, t: X = f(t). The differentiation, by the way, yields V(t) = 32t. The speed of the ball 3.21 seconds later would be V(3.21) = 32 x 3.21 = 102.72ft/second.)
Not everyone fell for Samuelson, though. Harvard refused to hire him. The newspaper of the record mentioned the incident in the obituary but used a red herring to spin it:
Harvard made no attempt to keep him, even though he had by then developed an international following. Mr. Solow said of the Harvard economics department at the time: “You could be disqualified for a job if you were either smart or Jewish or Keynesian. So what chance did this smart, Jewish, Keynesian have?”We could see that Mr. Solow is being disingenuous. Harvard not keeping Samuelson had nothing to do with his smartness or Jewishness or Keynesianism. Only that the pre-Dershowitz, pre-Summers, pre-Kagan Harvard of yesteryears at times saw through the fools and passed on the opportunity to retain them. Those were the days that the nation’s oldest university could have gone either way.
There was of course a reason for Samuelson’s embrace of mathematics, which I pointed out in Vol. 1:
The years leading up to World War II and immediately following it, brought unprecedented advances in technical and theoretical knowledge that culminated in the building of the atomic bomb. Mathematics was instrumental in that success. A skillful mathematician, it was believed, could solve all problems that lent themselves to mathematical formulation.Even the purest of mathematical thoughts are not completely void of ideological content, so there was a subtext to the use of mathematics, a hidden message of sorts. If Western economics could be described by the mathematics of Newtonian mechanics, it “followed” that economic system of the West was as solid and permanent as the world itself. And it would last that long. That theoretical lagniappe played no small part in facilitating the funding and propagation of Samuelson’s economics.
Pursuing mathematical finance was advantageous in other ways too. It provided a respite from the contentious ideological disputes in economics between the Left and Right that in the era of McCarthyism were beginning to assume an ever sharper, and potentially career-ruining, tone. Research in mathematical finance had no downside risk. It was socially safe, it provided a perfectly respectable line of research and, with luck, it could lead to new discoveries and from there, to fame and fortune.
Ultimately, though, what the man said was drivel. It corresponded to nothing in real life, so it was forgotten. Then came the collapse of the Bretton Woods system in the early 70s and the rise of speculative capital which gave a new lease on life to the application of mathematics in finance.
Speculative capital is capital engaged in arbitrage: simultaneously buying and selling two equivalent positions. That amounts to – and requires – the instantaneous buying and selling of the positions. From Vol. 1:
After any purchase, the speculator faces the risk that what he has just bought will fall in price. That can only happen with the passage of time. It is through time that the price of widgets drops, and it is through time that the speculator fails to find a buyer. Time is the medium through which the risk–and everything else–materializes. To the uncritical, yet practical, mind of the speculator, time appears as the source of the risk. He concludes that if the time between his purchase and sale is shortened, the risks of the transaction must proportionally diminish. In the extreme case, when the time between the two is zero, the risk would completely disappear. In that case, he could earn a risk-free profit. That is because no purchase is made unless a sale is already in hand. When the time between purchase and sale is reduced to zero, the two acts become simultaneous. A simultaneous “buy-low, sell-high” results in a risk free profit. That is arbitrage. The speculator has found the Holy Grail of finance: making money without risking money.Speculative capital rapidly expanded to dominate the trading pattern of financial markets. The expansion required people skilled in mathematics to detect the arbitrage opportunities. These people were found in the math and physics departments. The newcomers applied themselves and their skills to their new field and soon produced a voluminous body of work in finance that seemed coherent, even revolutionary and groundbreaking. The Black-Scholes option valuation formula is perhaps the most outstanding example of their accomplishments.
That is how continuous-time finance came to be, with the practitioners of the discipline becoming known as “quants” or “rocket scientists” by virtue of their mastery of mathematics.
But they knew nothing of economics or finance. In Bernestein’s early 90s bestseller, Capital Ideas, tellingly sub-titled The Improbable Origins of Modern Wall Street, there is a telling passage about them:
The gap in understanding between insiders and outsiders in Wall Street has developed because today’s financial markets are the result of a recent but obscure revolution that took root in the groves of ivy rather than in the canyons of lower Manhattan. Its heroes were a tiny contingent of scholars, most at the very beginning of their careers, who had no direct interest in the stock market and whose analysis of the economics of finance began at high levels of abstraction.“No direct interest in the stock market” means no background in economics and finance. And the “high levels of abstraction” that Bernstein observed likewise had to do with forcing mathematics on finance without regard to, or awareness of, its social aspects. We saw in Vol. 3, for example, how Black, Scholes and Merton priced the options and yet got the options fundamentally wrong.
The consequence of this ignorance, as always, was in prediction of the future. If you know the relation between mass, force and acceleration, you could predict with precision the behavior of a satellite millions of miles from the earth. You could surmise the existence of a planet even if you could not see it.
Economic relations are never that exact, but fundamentals still apply. If you know that profit rate tends to fall, you would not be surprised by the persistent unemployment in the West or the events taking place in Europe; you would not ask, How is it that as the people’s health improve, they have to work longer and harder for less wages and a smaller safety net?
Or, if you know that arbitrage is by definition self-destructive, you would expect a crash in financial markets – if not sooner, then later.
But the pioneers of modern finance knew nothing of these principles. They noted the increase in trading and observed that it led to lowering spreads. But they interpreted it as the march of capital markets towards “efficiency”, which to them meant low trading costs. And since the markets were only rising, it stood to reason that everyone would soon be trading.
The new world of CTF thus envisioned was a bona fide Norman Rockwell tableau in which everyone constantly and incessantly traded: businessmen in New York during their commute, Valley girls in LA on their way to parties, salt-of-the-earth farmers in the Midwest, the rednecks in the South, retirees in Florida, blacks in Watts and smartly dressed preppies in Greenwich – they all traded all the time. Jews, too. Yes, most definitely Jews, too.
The real life turn of events proved a tad more Gothic.
Monday, October 11, 2010
The Laborers of the World! Behold the Three Nobel Prize Winning Labor Economists: Larry, Curly and Moe
In an ideal world, I would not have bothered with this year’s three Nobel Prize winners in economics; they would not have merited a mention. But this is not an ideal world.
According to the New York Times, three men won the Nobel Prize in economics for their work on “markets where buyers and sellers have difficulty finding each other, and in particular on the difficulties of fitting people to the right jobs.”
So, in a nutshell, the contribution of prize winning scholars to economics is applying the business model of dating services to the labor market.
As for the specific applications of their research:
Without having the slightest familiarity with their plans, let me then predict their future research topics: why some work in factories, others in department stores and still the third group in banks? Why some workers commute long hours and some don’t? Why do workers look different? Why are some workers men, others women?
But let’s not laugh, even though the characters are clownish, as behind their seemingly idiotic research stands a serious and sinister purpose. Why else would their research be funded?
Note, for starters, “why wages do not fall much during recessions even though that might make additional hiring more attractive to employers”. You do know where this line is going, right? In case you don’t, the Times spells it out for you:
There is more. According to Robert Shimer of the University of Chicago:
The logical policy directive, then, if you are a politician who really cares about the unemployed? Why, cut the unemployment benefits and make sure that workers are not protected by regulation.
Let me end with a question of protocol.
Aren’t three Nobel Prize winning academics entitled to a respectful treatment of their work, without being called stooges? Can’t disagreement with them, no matter how strong, be polite?
The answer is, No. It would have been Yes, if the agenda of their research had been their own, set by them. But it is not. The purpose of their research is to ennoble the ideas of businessmen beneath the veneer of science. And not ordinary, everyday businessmen, but the most self-serving, vicious, narrow minded and ignorant of the lot.
In Opinions That Men Hold, I quoted Mortimer Zuckerman from a Wall Street Journal opinion piece. Here is a longer paragraph of what he wrote:
People drawing dole to sit around and do nothing.
“If there is one great policy failure of this recession, it’s that we have not used the crisis to introduce structural reforms”, i.e. cut the unemployment benefits and do away with labor regulation.
Sound familiar?
Enough said.
According to the New York Times, three men won the Nobel Prize in economics for their work on “markets where buyers and sellers have difficulty finding each other, and in particular on the difficulties of fitting people to the right jobs.”
So, in a nutshell, the contribution of prize winning scholars to economics is applying the business model of dating services to the labor market.
As for the specific applications of their research:
Some of the applications of the research include understanding why unemployment rises during recessions, why similar workers get different wages, why wages do not fall much during recessions even though that might make additional hiring more attractive to employers, and how so many people can be unemployed even when there are a large number of job openings available.Three mature, presumably fully developed adults trained as economists want to know why unemployment rises in times of recession.
Without having the slightest familiarity with their plans, let me then predict their future research topics: why some work in factories, others in department stores and still the third group in banks? Why some workers commute long hours and some don’t? Why do workers look different? Why are some workers men, others women?
But let’s not laugh, even though the characters are clownish, as behind their seemingly idiotic research stands a serious and sinister purpose. Why else would their research be funded?
Note, for starters, “why wages do not fall much during recessions even though that might make additional hiring more attractive to employers”. You do know where this line is going, right? In case you don’t, the Times spells it out for you:
Their work has suggested, for example, that unemployment benefits can have the unintended consequence of prolonging joblessness by making it less costly to be without work.Unemployment benefits prolong joblessness. That’s one conclusion for you.
There is more. According to Robert Shimer of the University of Chicago:
“Most of these models suggest that even in a depressed economy, more generous unemployment benefits tend to raise the unemployment rate.”And according to Prof. Lawrence Katz of Harvard:
“If you make it harder to hire and fire, then you end up with what’s called a sclerotic labor market, with less movement between jobs and more long-term unemployment.”So, now we “know” that: i) the unemployment benefits increase unemployment; and ii) unemployment is the result of labor market regulation.
The logical policy directive, then, if you are a politician who really cares about the unemployed? Why, cut the unemployment benefits and make sure that workers are not protected by regulation.
Let me end with a question of protocol.
Aren’t three Nobel Prize winning academics entitled to a respectful treatment of their work, without being called stooges? Can’t disagreement with them, no matter how strong, be polite?
The answer is, No. It would have been Yes, if the agenda of their research had been their own, set by them. But it is not. The purpose of their research is to ennoble the ideas of businessmen beneath the veneer of science. And not ordinary, everyday businessmen, but the most self-serving, vicious, narrow minded and ignorant of the lot.
In Opinions That Men Hold, I quoted Mortimer Zuckerman from a Wall Street Journal opinion piece. Here is a longer paragraph of what he wrote:
If there is one great policy failure of this recession, it’s that we have not used the crisis to introduce structural reforms. For example, we have a gross mismatch of available skills and demonstrable needs. Businesses struggle to find the skills and talents that are needed to compete in this new world. Millions drawing the dole to sit around should be in training for the jobs of the future that require higher educational skills.There is a gross mismatch of available skills and demonstrable needs.
People drawing dole to sit around and do nothing.
“If there is one great policy failure of this recession, it’s that we have not used the crisis to introduce structural reforms”, i.e. cut the unemployment benefits and do away with labor regulation.
Sound familiar?
Enough said.
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